Separately, the OECD research body said G20 leaders meeting in Cannes this week need to take “bold decisions”.

The Organisation for Economic Co-operation and Development said the rescue plan announced by EU leaders on 26 October had been an important first step, but the measures must be implemented “promptly and forcefully”.

The OECD’s message to world leaders came as it predicted a sharp slowdown in growth in the eurozone and warned that some countries in the 17-nation bloc were likely to face negative growth.

‘Moment of truth’

In its World of Work Report 2011, the ILO said a stalled global economic recovery had begun to “dramatically affect” labour markets.

It said approximately 80 million net new jobs would be needed over the next two years to get back to pre-crisis employment levels.

But it said the recent slowdown in growth suggested that only half the jobs needed would be created.

“We have reached the moment of truth. We have a brief window of opportunity to avoid a major double-dip in employment,” said Raymond Torres from the ILO.

The group also measured levels of discontent over the lack of jobs and anger over perceptions that the burden of the crisis was not being fairly shared.

It said scores of countries faced the possibility of social unrest, particularly those in the EU and the Arab region.

(Reuters) – The parliament of tiny Slovakia stalled the expansion of a bailout fund to rescue the euro zone from its debt crisis on Tuesday, but international lenders said they were likely to grant a loan to Greece next month, buying time for a broader response.

European Central Bank chief Jean-Claude Trichet said the debt crisis had become systemic and must be tackled decisively.

Slovakia is the only country in the 17-member currency zone that has yet to approve giving new powers to the European Financial Stability Fund. The expansion was agreed by euro zone leaders in July but must be ratified by each country.

The EFSF is Europe’s main weapon to respond to a debt crisis that threatens the European common currency, the region’s banks and potentially the global financial system.

The government of Slovak Prime Minister Iveta Radicova fell on Tuesday after a small party in her ruling coalition refused to back the plans. The outgoing government still expects to be able to enact the measure as a caretaker administration by the end of this week with support from an opposition party.

“There is an assumption that the EFSF, one way or the other, will be approved by the end of the week,” Finance Minister Ivan Miklos told parliament ahead of the vote.

The failure in the Slovak parliament underlines the difficulty of forging a united response to the worsening debt crisis in a currency zone where all 17 member states must act in concert, and voters are increasingly angry at the growing costs.

Leaders are struggling to find a response that would protect euro zone banks if Greece defaults on its debts.

For now, Athens needs an immediate infusion of cash within weeks just to meet state payrolls. A loan programme has been held up while the European Union and IMF assess whether Greece is doing enough to get its finances in order.

After a weeks-long review of Greece’s finances, inspectors from the European Union, IMF and European Central Bank, known as the troika, said an 8 billion euro loan tranche should be paid in early November. It still requires approval by euro zone finance ministers and the IMF.

MORE REFORMS NEEDED

The troika warned that Greece had made only patchy progress in meeting the terms of a bailout agreed in May last year.

“It is essential that the authorities put more emphasis on structural reforms in the public sector and the economy more broadly,” the troika said in a statement.

It said additional measures were likely to be needed to meet debt targets in 2013 and 2014, and a privatization drive and structural reforms were falling short.

Germany, the euro zone’s biggest economy, said a decision on whether to make the aid payment was still open.

A German Finance Ministry spokesman said the troika’s verdict showed “both light and shadows”:

“We’ll wait and look at the report, analyze it and then decide what will happen with the sixth tranche.”

That money would anyway only buy Greece and its euro zone partners a small amount of time.

Germany and France, the leading powers in the 17-nation euro zone, have promised to propose a comprehensive strategy to fight the debt crisis at an EU summit delayed until October 23.

After Athens admitted it would not meet its deficit target this year, there is a growing acceptance that a second Greek bailout agreed in July with private bondholders’ participation may need to be renegotiated. A rush is now on to beef up the currency bloc’s rescue fund and bolster its banks.

Trichet issued the dramatic warning as chairman of the European Systemic Risk Board, created to avoid a repeat of the 2008 financial crisis, amid growing fears that Greece will default on its massive debt.

“The crisis is systemic and must be tackled decisively,” Trichet told a European Parliament committee in his final appearance before retiring at the end of the month.

“The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion. It threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond.”

NEW BANK DATA SOUGHT

European banking regulators meanwhile asked banks across the continent to provide updated data on their capital position and sovereign debt exposures to help reassess their need for recapitalization.

European Commission President Jose Manuel Barroso said the EU executive would present proposals for bank recapitalization and other aspects of the crisis response on Wednesday.

Industry sources said the EU banking regulator had demanded lenders achieve a core capital ratio of at least 7 percent in a new round of internal stress tests, and banks that failed to reach that mark would be asked to bolster their capital.

That would mean some 48 banks would be required to raise a total of 99 billion euros in capital, according to a Reuters Breakingviews calculator using data from previous stress tests. Greek banks would need nearly a third of the total.

For a comprehensive deal to come together, the bloc’s leaders must resolve differences over how to recapitalize banks, whether to force a Greek debt restructuring or stick to the existing voluntary deal with private bondholders, and how to use the euro zone’s rescue fund.

Europe’s inability to draw a line under the crisis has caused growing international alarm, with Japan weighing in on Tuesday after the United States and Britain pressed EU leaders to take decisive action.

Tokyo said it would consult with Washington before it considers buying more euro zone bonds. Finance Minister Jun Azumi urged Europe to restore market confidence in the run-up to a Group of 20 finance leaders’ meeting in Paris this week.

Interbank lending rates in Europe continued to rise amid growing concern over European banks’ ability to operate, despite the prospect of massive ECB liquidity support.

Some European banks voiced concern at the prospect of being forced by governments to raise additional capital that some say they do not need, possibly by taking public money. One senior banker said that could lead to legal challenges in Germany.

Germany’s BDB banking association said Europe should look at recapitalization on a case-by-case basis rather than taking a blanket approach apparently envisaged by Berlin and Paris.

The director of the association, Michael Kemmer, also told ARD television that politicians should stick to a July agreement on private bondholder involvement in a rescue plan for Greece, which called for a 21 percent writedown.

German Finance Minister Wolfgang Schaeuble and the chairman of euro group finance ministers, Jean-Claude Juncker, have said that figure may no longer be sufficient and the talks may have to be reopened.

Speaking on Austrian television late on Monday, Juncker refused to rule out a mandatory debt restructuring for Greece, which many market analysts and economists say is bound to happen in the coming months. Many analysts see the rush to recapitalize European banks as a prelude to an enforced write-down of 50 percent or more on their Greek debt holdings.

The latest economic data suggest that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Bros. in 2008. The risks of an economic and financial crisis even worse than the previous one—now involving not just the private sector, but also near-insolvent governments—are significant. So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown?

First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the Eurozone’s periphery such as Greece or Portugal are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. These countries include the United States, the United Kingdom, Germany, the core of the Eurozone, and Japan. Infrastructure banks that finance needed public infrastructure should be created as well.

Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the U.S. Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures.

Third, to restore credit growth, Eurozone banks and banking systems that are undercapitalized should be strengthened with public financing in a European Union-wide program. To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements. Also, since the U.S. and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential.

Fourth, large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency. Even with policy changes, it takes time for governments to restore their credibility. Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely.

Today, Spain and Italy are at risk of losing market access. Official resources need to be tripled— through a larger European Financial Stability Facility, Eurobonds, or massive ECB action—to avoid a disastrous run on these sovereigns.

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Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity. This needs to be carried out for insolvent governments, households, and financial institutions alike.

Sixth, even if Greece and other peripheral Eurozone countries are given significant debt relief, economic growth will not resume until competitiveness is restored. And, without a rapid return to growth, more defaults—and social turmoil—cannot be avoided.

There are three options for restoring competitiveness within the Eurozone, all requiring a real depreciation—and none of which is viable:

A sharp weakening of the euro toward parity with the U.S. dollar, which is unlikely, as the United States is weak, too.

A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.

A five-year cumulative 30 percent deflation in prices and wages—in Greece, for example—which would mean five years of deepening and socially unacceptable depression. Even if feasible, this amount of deflation would exacerbate insolvency, given a 30 percent increase in the real value of debt.

Because these options cannot work, the sole alternative is an exit from the Eurozone by Greece and some other current members. Only a return to a national currency—and a sharp depreciation of that currency—can restore competitiveness and growth.

Leaving the common currency would, of course, threaten collateral damage for the exiting country and raise the risk of contagion for other weak Eurozone members. The balance-sheet effects on euro debts caused by the depreciation of the new national currency would thus have to be handled through an orderly and negotiated conversion of euro liabilities into the new national currencies. Appropriate use of official resources, including for recapitalization of Eurozone banks, would be needed to limit collateral damage and contagion.

Seventh, the reasons for advanced economies’ high unemployment and anemic growth are structural, including the rise of competitive emerging markets. The appropriate response to such massive changes is not protectionism. Instead, the advanced economies need a medium-term plan to restore competitiveness and jobs via massive new investments in high-quality education, job training and human-capital improvements, infrastructure, and alternative/renewable energy. Only such a program can provide workers in advanced economies with the tools needed to compete globally.

Eighth, emerging-market economies have more policy tools left than advanced economies do, and they should ease monetary and fiscal policy. The International Monetary Fund and the World Bank can serve as lender of last resort to emerging markets at risk of losing market access, conditional on appropriate policy reforms. And countries like China that rely excessively on net exports for growth should accelerate reforms, including more rapid currency appreciation, in order to boost domestic demand and consumption.

The risks ahead are not just of a mild double-dip recession, but of a severe contraction that could turn into the Great Depression II, especially if the Eurozone crisis becomes disorderly and leads to a global financial meltdown. Wrong-headed policies during the first Great Depression led to trade and currency wars, disorderly debt defaults, deflation, rising income and wealth inequality, poverty, desperation, and social and political instability that eventually led to the rise of authoritarian regimes and World War II. The best way to avoid the risk of repeating such a sequence is bold and aggressive global policy action now.

A protest on Wall Street. Confidence has fallen and the risks are on the downside, the IMF said in its half-yearly report. Photograph: Keystone/Rex Features

The International Monetary Fund warned on Tuesday that the United States and the eurozone risk being plunged back into recession unless policymakers tackle the problems facing the world’s two biggest economic forces.

In its half-yearly health check, the Washington-based fund said the global economy was “in a dangerous place” and that its forecast of a slow, bumpy recovery would be jeopardised by a deepening of Europe’s sovereign debt crisis or over-hasty attempts to rein in America’s budget deficit.

“Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF said as it cut its global growth forecast for both 2011 and 2012.

The IMF’s World Economic Outlook cited the Japanese tsunami and the rise in oil prices prompted by the unrest in north Africa and the Middle East as two of a “barrage” of shocks to hit the international economy in 2011. It said it now expected the global economy to expand by 4% in both 2011 and 2012, cuts of 0.3 points and 0.5 points since it last published forecasts three months ago.

“The structural problems facing the crisis-hit advanced economies have proven even more intractable than expected, and the process of devising and implementing reforms even more complicated. The outlook for these economies is thus for a continuing, but weak and bumpy, expansion,” the IMF said.

Speaking at a press conference in Washington, Olivier Blanchard, the IMF’s economic counsellor, said there was “a widespread perception” that policymakers in the euro area had lost control of the crisis.

“Europe must get its act together,” Blanchard said, adding that it was “absolutely essential” that measures agreed by policymakers in July, including a bigger role for the European Financial Stability Fund (EFSF), should be made operational soon.

“The eurozone is a major source of worry. This is a call to arms,” he said.

Blanchard said the fund was cutting its growth forecasts because the two balancing acts needed to ensure recovery from the recession of 2008-09 have stalled. Governments were cutting budget deficits but the private sector was failing to make up for the lost demand. Meanwhile, the global imbalances between deficit countries such as the US and surplus countries such as China looked like getting worse rather than better.

“Markets have become more sceptical about the ability of governments to stabilise their public debt. Worries have spread from countries on the periphery of Europe to countries in the core, and to others, including Japan and the US, Blanchard said.

He added that there was a risk of low growth, fiscal, and financial weaknesses could easily feed on each other.

“Lower growth makes fiscal consolidation harder. And fiscal consolidation may lead to even lower growth. Lower growth weakens banks. And weaker banks lead to tighter bank lending and lower growth.” As a result, there were “clear downside risks” to the fund’s new forecasts.

Developing nations lead the way

In its report, the IMF said it expected the strong performance of the leading emerging nations to be the main driving force behind growth in the world economy. China’s growth rate is forecast to ease back slightly, from 9.5% in 2011 to 9% in 2012, while India is predicted to expand by 7.5% in 2012 after 7.8% growth in 2011.

Sub-Saharan Africa is expected to continue to post robust growth, up from 5.2% in 2011 to 5.8% in 2012.

The rich developed countries, by contrast, are forecast to grow by just under 2%, slightly faster than the 1.6% pencilled in by the IMF for 2011.

“However, this assumes that European policymakers contain the crisis in the euro periphery area, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate.”

“The risks are clearly to the downside,” the IMF added, pointing to two particular concerns – that policymakers in the eurozone lose control of the sovereign debt crisis, and that the US economy could weaken as a result of political impasse in Washington, a deteriorating housing market or a slide in shares on Wall Street. It said the European Central Bank should consider cutting interest rates and that the Federal Reserve should stand ready to provide more “unconventional support”.

It said: “Either of these two eventualities would have severe implications for global growth. The renewed stress could undermine financial markets and institutions in advanced economies, which remain unusually vulnerable. Commodity prices and global trade and capital flows would likely decline abruptly, dragging down growth in developing countries.”

The IMF said that in its downside scenario, the eurozone and the US could fall back into recession, with activity some three percentage points lower in 2012 than envisaged. Currently, the fund is expecting the US to grow by 1.8% in 2012 and the eurozone by 1.1%.

“In the euro area, the adverse feedback loop between weak sovereign and financial institutions needs to be broken. Fragile financial institutions must be asked to raise more capital, preferably through private solutions. If these are not available, they will have to accept injections of public capital or support from the EFSF, or be restructured or closed.”

The IMF urged Republicans and Democrats in Washington to settle their differences: “Deep political differences leave the course of US policy highly uncertain. There is a serious risk that hasty fiscal cutbacks will further weaken the outlook without providing the long-term reforms required to reduce debt to more sustainable levels.”

Who would have thought just 18 months ago that a member of the eurozone, the most elite club of economies in Europe, could have a worse credit rating than Pakistan? And yet this is the case for Greece today, perched on the verge of a debt restructuring; two other eurozone countries (Ireland and Portugal), meanwhile, are already in Europe’s intensive care unit, receiving large bailouts.

And who would have thought that a rating agency would dare question the sacred AAA credit rating of the United States, the sole supplier of global public goods such as the international reserve currency (the dollar) and a financial system that serves as the nexus of international capital flow? Still, that’s exactly what Standard & Poor’s has done: In August the agency downgraded the United States’ AAA status to AA+, citing policymaking uncertainty in Washington and the country’s lack of a long-term plan to deal with its fiscal problems.

And who would have thought that the same country, which is renowned for its flexible labor markets and dynamic entrepreneurship, would experience a persistently high unemployment rate? Well, this is the case for the United States, where unemployment is stuck at around 9 percent, unemployment among 20-to-24-year-olds is a staggering 14.5 percent, and the related joblessness problems are becoming increasingly structural in nature.

There are, of course, several bespoke reasons for these developments. But together, they speak to major realignments that are fundamentally changing the character of the global economy and how it functions. Three things in particular have had a significant influence, and they will continue to shape the world we live in for years to come.

First, too many advanced economies face problems rooted far below the surface, in their balance sheets and in the structure of their economies. This is not just about the unemployment crisis and the rapidly deteriorating public finances that, in cases such as Greece’s, have reached alarming levels. It is also about malfunctioning housing markets, a continued breakdown in bank credit intermediation, and weak political leadership in the midst of messy party politics.

Second, rather than deal with these structural problems, policymakers have preferred to kick the can down the road. As a result, the problems have festered and become more entrenched, and the risk of adverse contagion has risen.

This is most obvious in Europe, where a liquidity approach — involving piling new debt on top of already crushing obligations — has repeatedly been applied to Greece’s debt solvency crisis. This has also transferred massive liabilities from the private sector to Greek and European taxpayers and contaminated previously healthy institutions such as the European Central Bank. It is also the case in the United States, where unprecedented stimulus spending has failed to sufficiently reignite growth and job creation.

Third, several emerging economies have hit their developmental breakout phase, largely undeterred until now by the misfortunes of the developed world. You see this in Brazil, China, Indonesia, and several other countries. In the process, they have gone from strength to strength, so much so that their economies have started overheating at a time when more established countries are languishing. This is new territory for the global marketplace, one in which the less mature countries are more robust and resilient than their advanced peers and are able to grow sustainably at high levels while also strengthening their balance sheets.

Absent a major policy mistake — a lurch toward protectionism, disorderly defaults, or disruptions to the international payment and settlement system, for instance — we should expect these global realignments to continue.

It will take several years for the advanced economies to fully rehabilitate their balance sheets and restore the conditions for high growth and employment creation. In the meantime, income and wealth distribution will become even more skewed, morphing from an economic issue into a sociopolitical one.

The combination of stretched balance sheets and disappointingly slow growth also means that the advanced countries will opt for a mix of approaches to deal with recurrent debt concerns as they continue to de-lever from the age of credit and debt-entitlement. Some, such as Britain, will rely primarily on years of budgetary austerity. Others, like Greece, will succumb to debt restructuring.

Then there is the United States, the economy that anchors the core of the global economic and financial systems. It will initially opt for financial repression — essentially a hidden taxation of creditors and depositors — and attempt higher inflation to address its balance sheet issues. With time, however, it will likely be forced into greater austerity amid noisy political posturing and bickering.

The messier this transition, the greater the risk of undermining the international standing of America’s global public goods. This in turn will challenge a global monetary system built on the assumption that its core — the United States — remains economically strong.

This is an important qualifier for what otherwise would be a far more encouraging outlook for much, though not all, of the emerging world. Look for these countries to continue to close the income and wealth gaps vis-à-vis the advanced countries. In the process, they will pull millions more out of poverty, providing them with greater economic opportunities and better access to education, health care, and nutrition.

As they continue to grow, emerging countries will push for greater accommodation on the part of a global economy that is still overdominated by the advanced economies. Global governance issues will come to the fore. International institutions will be pressured to reform more seriously. And multilateral negotiations will need to be more respectful of the growing strength of the emerging countries.

All this translates into an unusually fluid global economy — and a world in which many established parameters will instead become variables. The sooner we prepare for it, the greater the chance that we are beneficiaries of the transformations taking place, not their victims.

With both Europe and the United States unable to stimulate their economies, and China seemingly paralyzed into indecision, it’s worth asking if we are about to experience a Creditanstalt moment.

The start of the Great Depression is commonly assumed to be the October 1929 stock market crash in the United States. It didn’t really become the Great Depression, however, unti 1931, when Austria’s Creditanstalt bank desperately needed injections of capital. Essentially, neither France nor England were willing to help unless Germany honored its reparations payments, and the United States refused to help unless France and the UK repaid its World War I debts. Neither of these demands was terribly reasonable, and the result was a wave of bank failures that spread across Europe and the United States.

The particulars of the current sovereign debt crisis are somewhat different from Creditanstalt, and yet it’s fascinating how smart people keep referring back to that ignoble moment. The big commonality is that while governments might recognize the virtues of a coordinated response to big crises, they are sufficiently constrained by domestic discontent to not do all that much.

So… is this 1931 all over again?

There are three aspects of the current situation that make me fret about this. The first is the sense that developed country governments have already tapped out all of their politically feasible methods of stimulating their economies. This is the time when both politicians and voters start to ask themselves, “Why not pursue the crazy idea?”

The second is whether the Chinese government will do something to satiate their nationalist constituency. Neither Joe Nye nor James Joyner thinks this is likely, and I tend to agree that any effort at economic coercion will hurt China as much as the United States. When autocrats are up against the wall, however, then they might take risks they otherwise would never consider.

From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble crosscountry evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor.

So… there are, unfortunately, numerous reasons to think that we’re headed down a bad road… which is the pretty much point of this post.

Readers are encouraged in the comments to offer counterarguments for why things aren’t as bad as 1931. I’ll be offering some thoughts about why 1931 won’t happen again later in the week.

It is hard to deny. Things are looking bleak. But are they as bad as they could get?

The answer, of course, is no.

Here are 10 things that could happen between now and the end of next year that could make things much worse and why President Obama should consider not running for reelection.

Europe’s debt crisis could deepen
The European Central Bank’s interventions to prop up Spain and Italy could prove inadequate. EU leaders will continue to avoid real structural reform. European banks, now showing a reluctance to lend (akin to their mood immediately after the collapse of Lehman Brothers) could themselves teeter, burdened by the prospects of sovereign debt defaults and a global slow down. Spain and Italy could take a turn for the worse. The rest of the world, preoccupied with their own problems, might be as distracted as are the northern Europeans frustrated with bailing out their feckless southern neighbors.

Tensions tighten
Europe’s economic problems could beget deepening social tensions. Unrest like that seen in the United Kingdom could become more commonplace. With jobs drying up, anti-immigrant violence could grow. Nationalism could feed off these tensions and fuel more steps like Denmark’s move away from the EU’s commitment to open borders among its states.

U.S. recession regressionThe United States could officially enter recession. Reduced tax revenues will be one painful consequence of the slow down. Politicians will struggle to reduce debt but find it hard to do so in the near term. The problem will burgeon. Small- and medium-sized communities will default. Several large cities and perhaps one or two significant states will be at risk of being unable to pay their bills. Draconian cutbacks in police and social services will blend with high unemployment and growing inequality to produce social unrest in the United States. Stock markets will continue their slide.

Global contagionWe could enter a global recession. Downturns in the United States and the European Union could feed off of one another and the fragile Japanese economy would almost certainly sink as a result. Credit tightness and political indecisiveness will deepen the gloom.

Inflation hits the BRICs
While emerging markets like China and Brazil might see inflation worries ebb due to the global recession and falling demand for high-priced commodities … they might not. Their currencies could strengthen as established ones falter, making exports more costly at just the wrong moment. Secular growth in demand for commodities may slow declines somewhat reducing the “benefits” of declining demand. Alternatively, or additionally, real estate and financial bubbles might burst in each of these countries as investor doubts grow. Note that Brazil took a particular beating during the recent downward market spike.

Middle East meltdown
Tensions in the Middle East could grow. Palestine’s push for statehood might be followed by massive displays of civic unrest. An Israeli government burdened with economic problems of its own and a little arthritic when it comes to its willingness to show flexibility with its near-neighbors will move too slowly. States elsewhere in the region grappling with their own problems — a more anti-Israel Egypt, Syria, Iran, and others — will fan the flames. Meanwhile, the problems in those states will put the entire region on the edge of an unprecedented meltdown. Thus, even with falling global demand and the recent downturn in oil prices, you could see upward pressure on petroleum as well. Then, Iran announces it has successfully tested a nuclear weapon.

Sub-continental showdownThe government in Pakistan could totter or be decapitated thus heightening fears of even more pronounced Islamist influence and of growing tension with India. Indian markets fall. The Indian government is unable to pursue needed economic reforms. Social unrest might be seen throughout the sub-continent.

Another EyjafjallajokullOne or more exogenous events of the type that regularly occur without warning — a terror attack, an earthquake, a tsunami, a devastating hurricane or typhoon, the eruption of an Icelandic volcano — could slam a major economy weakening the global situation further.

Expect the unexpected
An unexpected or unexpectedly intense conflict could erupt in the Russian near abroad, in Central Asia, in Turkey, in Africa, or in the Middle East creating even more uncertainty. With economically unsteady and politically hesitant leadership in the world’s most important powers growing instability fueled by rogue opportunists seems increasingly likely.

Some combination of the above could then turn the global recession plus related banking, derivatives and stock-market crises into a depression.

It is undeniable that many of the above developments are not highly likely. But what is striking is just how plausible most of them are. These are the kind of medium-to-low probability outcomes with significant consequences that planners must take into account. It is also easy to see how further inaction, half-steps, and wrong steps by leaders could make these and other grim turns much more likely.

Such possibilities should not trigger panic. They should however, focus the minds of politicians, bankers, and electorates everywhere. The problem with the leadership failures of the recent past is not just that they have slammed the world economy yet again, it is that they have made the future more dangerous than it was.

My fantasy is that recognizing this, President Obama would do as he once promised he would do, set personal ambition aside and announce he is not running for re-election. Instead, he would say that he wanted to shrug off the straight jacket of political considerations and focus exclusively on finding bi-partisan solutions to America’s problems. Perhaps he would make a bold gesture, like appointing Erskine Bowles and Alan Simpson co-secretaries of the Treasury or, at least, give both economic leadership roles on his team. Others in the Democratic Party can focus on 2012 and beyond. There are many qualified to lead. (Who knows, perhaps the next candidate we find can actually have experience with markets and with the rest of the world.) There are certainly plenty of Democrats who stand head and shoulders above the current, feeble array the Republican Party has rolled out, which will only grow more feeble with the likely addition of Rick Perry this weekend. And then Barack Obama, a decent, talented, and gifted man, can fashion a unique legacy for himself, as a public servant who actually thought his first duty was to serve the public.

But, I’ll admit it, that fantasy is less likely to occur than any of the other events I listed above. And so I will continue to hope for the next best thing: The president and his fellow heads of state and government worldwide begin to govern as though they didn’t care whether they won re-election or not, but instead as though their top priorities was ro

In a report released Monday, the United Nations Environment Programme outlined a sustainable public policy and investment plan that said just two-percent of the global domestic product could move the world from fossil fuel dependency to a low carbon economy. Currently, two-percent of the GDP is being spent on unsustainable practices like fossil fuel use, pesticide subsidies, and fisheries. By shifting focus, it is believed that the divergent approach in investment would kick-start a green economy and alleviate global poverty.

“With 2.5 billion people living on less than $2 a day and with more than two billion people being added to the global population by 2050, it is clear that we must continue to develop and grow our economies,” said UNEP Executive Director Achim Steiner in a press release. “But this development cannot come at the expense of the very life support systems on land, in the oceans or in our atmosphere that sustain our economies, and thus, the lives of each and everyone of us.”

If the two percent were put towards green investments, the report says the economy would grow at the same rate, if not faster, than it would under the current conditions — except the growth would be without the risks, shocks, and scarcities increasingly seen in the existing “brown” economy. The report indicates that the initial transition would cause a loss of jobs in some sectors, but it would eventually produce more than enough jobs to make up for any losses. The transition would also be a catalyst for growth in developing countries, where up to 90 percent of the GDP of the poor is linked to the environment or nature capital, like forests and freshwater.

The key to change lies in our governments. The report says that our political leaders need to create public policies that would generate and support a green economy by directing private investments toward green industry. Without the support of the government, any transition to a healthier, greener economy is unlikely.

WHY THIS MATTERS

The UNEP report reveals how little it would take for us to do the right thing and set us on a green track permanently. By shifting the focus of just two percent of the GDP, we would cut our collective carbon footprint in half, put fossil fuels behind us, and alleviate global poverty. In other words, we’d save the planet.

ScienceDaily (June 9, 2011) — Researchers from the UK Research Councils’ Rural Economy and Land Use Programme say that we face a future of uncertainty, and possible new threats to our food supplies, natural heritage, and even human health, from animal and plant pathogens. Human behaviour, travel and trade exacerbates the problem and we may need to reconsider our approach to free trade.

We face a future of uncertainty, and possible new threats to our food supplies, natural heritage, and even human health, from animal and plant pathogens, according to researchers from the UK Research Councils’ Rural Economy and Land Use Programme.

In a special issue of Philosophical Transactions of the Royal Society B, the academics take a fresh look at infectious diseases of animals and plants, from an interdisciplinary perspective.

They conclude that increasing global trade may put us at greater risk from pathogens in the future, as more exotic diseases enter the country. This process is already happening, particularly in plant disease. Climate change is driving shifts in cropping patterns across the world and they may take pests and diseases with them. We are also seeing completely new pathogens evolve, while existing ones develop the ability to infect new hosts. During the 20th century the number of new fungal, bacterial and viral diseases in plants appearing in Europe rose from less than five per decade to over 20.

But these problems are exacerbated by human behaviour, and understanding this could be key to helping policymakers deal with risk and uncertainty.

In many cases the spread of disease is caused by increased trade, transport and travel. Trends in the international horticultural industry have been towards fewer, larger producers, supplying vast numbers of retailers. Thus, disease which begins in one location may be spread far and wide.

Changes in the livestock trade have similar effects at national level. Reduction in income per animal, and the introduction of mechanisation, means that fewer farmers manage more animals per farm, and animals are moved around more frequently. They may be born in one location but sold on and reared elsewhere. Government policy and the classification of diseases may even increase the risks. Farmers restocking to combat one disease may, unwittingly, introduce another.

Understanding the biological dimensions of animal and plant disease is important, but it is equally important to understand the role played by human beings in spreading disease. Whether the threat is from a tree disease such as Sudden Oak Death that could devastate familiar landscapes, or from zoonotic diseases such as E coli or Lyme disease that affect human health, it can only be addressed effectively if an understanding of human behaviour is part of the strategy, and people are given the information they need to reduce risks.

Director of the Relu Programme, Professor Philip Lowe said: “We live in a global economy: we have seen in the recent E. coli outbreak in Germany, how the complexity of the food chain can increase risk and uncertainty.

“Ultimately we may have to take a more precautionary approach to the movement of animal and plants, and recognise that free trade could, in some cases, pose unacceptable risks.”